Further, export tax rebates on labor-intensive products, including musical instruments, textiles and toys, have been reduced. Nan said that the rebate on pianos and guitars fell from 17 percent to 13 percent.

Due to these factors and the appreciation of the Chinese yuan, which has appreciated by 14 percent against the US dollar since 2005, Sejung's profit margin plummeted from 10 percent in 2004 to 0.3 percent.

Nan said some small foreign companies must move to Vietnam or some other Southeast Asian country as they cannot adapt to changed environment.

According to Piao Jianyi, a researcher at the Chinese Academy of Social Sciences (CASS), "95 percent of Korea-funded enterprises in China are labor-intensive and energy-consuming industries with low technology." Piao said that these sunset industries couldn't survive in the ROK and moved to China to keep going.

Now, they're on the move again.

Cho Hak Rae of Cuckoo Electronics, based in the ROK, said his company had been losing money in China since 2004. The parent company originally planned to build some support facilities and an institute to accompany its manufacturing facilities. But due to the changing investment environment, the planned investment will go into lower-cost Southeast Asian countries.

Welcome mat withdrawn for low-tech industry

At the dawn of China's opening-door era, in 1978, foreign investment was badly needed for economic development. A series of favorable policies, including taxes and land, were provided to attract foreign investors. The sunset industries left the ROK for China, where they could boost profit margins. They had no incentive to improve their management or innovate. They're vulnerable in a changing investment environment, Piao added.

"The prices of all factors of production will increase for a long time to come," said Sang Baichuan, a professor at the Foreign Economic and Trade University. He added that cheap labor and land prices hindered the upgrading of industries.

China wants to move up the industrial ladder, Sang said, and it's not surprising that sunset industries will move to less-developed countries. Foreign investment in China will face a structural change, Sang said.

In its latest brochure for prospective foreign investors, issued in 2007 by the Ministry of Commerce, foreign enterprises are not encouraged to go into traditional manufacturing and export-oriented industries.

And foreign investment direct investment (FDI) in China is measurably changing. The National Bureau of Statistics said that FDI in actual use reached US$11.2 billion in January, up 109 percent year-on-year.

However, the number of new foreign enterprises has been declining. In January, 2,918 new foreign-funded enterprises were set up, a 13.41 percent decrease from a year earlier. More money invested by fewer firms means that the average investment of each enterprise has increased.

"We should focus on the outflow effect and internal innovation when utilizing FDI," said Sang. "The structural adjustment will adapt to the needs of times.

(Xinhua News Agency March 24, 2008)